Bernanke Offers Clues to Fed’s Economic Recovery Strategy

Federal Reserve Chairman Ben Bernanke offered some clues to the Federal Reserve’s economic recovery strategy in a speech last Friday at a San Francisco Federal Reserve conference called “The Past and Future of Monetary Policy.” Bernanke defended the Fed’s strategy of reducing borrowing costs by keeping interest rates low, arguing that rates will gradually rise in the long-term, which will benefit savers better than an immediate rate increase.

“If, as the FOMC (Federal Open Market Committee) anticipates, the economic recovery continues at a moderate pace, with unemployment slowly declining and inflation expectations remaining near 2 percent, then long- term interest rates would be expected to rise gradually toward more normal levels over the next several years,” Bernanke said, according to Bloomberg.

This would seem to be in line with the FOMC’s announcement in January that it will keep the benchmark interest rate near zero percent as long as the unemployment rate remains higher than 6.5 percent and inflation remains below 2.5 percent.

Despite the risks of encouraging asset-price bubbles, such as the recent housing-market crisis, Bernanke believes that the benefits of encouraging investors to seek higher returns through low interest rates far outweigh the dangers.